NSW, Vic no solution to gas price pain

Hot air in Turnbull's CSG solution for gas price crisis


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LNG exports have hiked gas prices, but relief for manufacturers is not on offer in NSW or Victoria.

LNG exports have hiked gas prices, but relief for manufacturers is not on offer in NSW or Victoria.

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PM blames states for crisis, but new CSG reserves no cheap solution

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Malcolm Turnbull is calling for drastic action to lower the unprecedented prices hitting gas-dependent manufacturers and NSW and Victoria are under intense pressure to encourage onshore coal seam gas development.

But the cost of production in these untapped reserves is far higher than Australia’s operating current gas fields, which means new supply will not reduce the price pain for struggling manufacturers.

Due to broad public opposition, including farmer and green groups, Victoria banned coal seam gas (CSG) activity outright, and NSW has restricted exploration to Santos’ Narrabri project, which is moving through the state’s approval process.

Mr Turnbull announced this week an agreement with Australia’s four gas producers to secure 100 petajoules of additional gas for the domestic market.

These supplies are needed, he argued, on the back of the Australian Energy Market Operator’s forecast shortfall in supply.

Further price hikes would be disastrous for regional industries such as wool processors and abattoirs, which have seen bills triple in some cases, from $5 a gigajoule to $15 a gigajoule.

According to Mr Turnbull, the long-term solution is for NSW and Victoria to produce their own gas. The states are to blame for rising prices because they had failed “to develop their own gas resources”, he said.

But the Prime Minister’s argument is questionable for two reasons: NSW is currently sending on gas from Bass Strait to Queensland and South Australia, demonstrating a current oversupply, and Australia’s market regulator says the cost of NSW’s gas resources do not stack up against interstate options.

The Australian Energy Market Operator puts the cost of production of gas delivered to the wellhead at Narrabri at $7.25 a gigajoule. Queensland gas costs vary, from under $3 to under $6 a gigajoule at the wellhead.

Those prices come before transport, processing and retail margins are factored in, and would still leave an expensive bill for industrial consumer compared to prices before liquefied natural gas exports kicked off in 2016, linking domestic prices to the international market.

“Narrabri is expensive gas to extract, transport and then you have the margin on top of that. It’s too expensive and will do nothing to reduce gas prices for users in NSW, and there is nothing stopping Santos from exporting it through its LNG terminals (in Queensland),” said gas spokesman for progressive think tank The Australia Institute Mark Ogge.

Australian Consumer and Competition Commission chairman Rod Sims said this week the “it was fair to conclude (gas) prices had been gouged”, the but the question remained if it was the gas producers, the pipeline owners or the retailers, “or all three”.

“It is very serious. I don’t often use the word crisis very often. But I actually think there is a crisis… it’s pretty ugly out there,” Mr Sims said.

The situation is particularly galling for local gas users. The long term gas supply contracts offered by Australia’s exporters to Japanese buyers is significantly cheaper than the long term domestic contracts on offer.

Analyst for the pro-renewable energy Institute for Energy Economics and Financial Analysis Bruce Robertson said excessively high prices have been created by the gas companies and developing Narrabri

“The recent ACCC report clearly demonstrates that in first quarter this year, spot gas sales in Australia had an average price of over $9 and in Japan it was $6.50 in the first quarter. That is clear evidence of cartel like behaviour, starving the Australian market to keep contract prices high.

“The argument that states have to supply their own gas is bunkum. There is freedom of trade written into the Australian constitution.

Look at Queensland import all their milk, does this mean every state have to supply all of its own resources? No, you should source it from where it is cheapest to produce.”

“Santos has already written off $1.2 billion from the value of the Narrabri project because it has less gas than they first thought. If we deliver high cost, uncompetitive gas, and Narrabri gas is globally uncompetitive, that would embed a costly inefficiency in the Australian economy.”

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